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Federal Reserve Notes of March 19, 2014

The Federal Reserve Bank (Fed) has kept interest rates very low for over 3 years now with the intent of keeping them low until the economy has a true recovery. Thus to date, it has been a largely jobless recovery. The economy cannot have a true sustained JOB creating economy until banks begin to lend these huge reserves. Banks will NOT lend at these extremely low rates. Today, Fed Chairwoman Yellen completely reversed policy by stating that the jobless number is not the primary driver of what will be considered an economic recovery. They intend to raise rates and begin steady tapering of operation twist. This will increase the money supply and provide a stimulus for potential real inflation. Inflation will cause a contraction and potential increase in unemployment. There are four major reasons why the Fed has culpability in the very slow recovery as a direct result of their planned policies: The FED is paying banks interest on their reserves. This action, coupled with low rates, discourages lending, Feds encouraged/allowed too Big to Fail to become policy, Fed led the way in over regulation of the banks via Dodd/Frank which demands much higher reserve requirements and places onerous regulations on lending, The Fed drove rates so low as to place banks into the classic Liquidity Trap -rates on lending/bonds are too low and there is an expectation of rates rising in the future. This discourages bond buyers from investing in bonds. Savings are held and therefore no lending occurs. The Fed ordered banks to raise reserves to much higher levels than in the past and discouraged lending via Dodd/Frank and other regs that place enormous demands/requirements on borrowers. These large reserves are not inflationary until they are lent. Lending will not occur until rates...
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The Minimum Wage

Increasing the Minimum Wage Increases Unemployment The argument for a continuously higher minimum wage is based on the premise that “a working man deserves a decent living wage” and therefore the solution is to raise the federal minimum wage to a so-called decent level. The problem is that it doesn’t work when viewed from a realistic economic perspective. For sake of argument, let us agree that the objective of raising the minimum wage to a decent standard of living is a laudable goal and that it is the responsibility of the Federal Government, that is to say that it will be paid for by the American Taxpayer. The argument for the minimum wage is based solely upon some notion of fairness and the goal of raising the working poor’s standard of living. That is a noble endeavor but unfortunately it will have the negative effect of raising unemployment within the very class of people that the proponents of the federal minimum wage law have targeted. Their unemployment must rise as a matter of simple economic truth. Labor as a percentage of total costs is a material amount. In manufacturing, total burden labor (which is overhead that includes wages, vacation, sick leave, 401k matching, etc.) exceeds 30% of total in-house costs. The remainder of overall expenses includes raw materials and parts (which have labor embedded in those costs too), and the cost of operations like rent, utilities, etc. In the food stuffs industry labor is typically 40% of total costs or higher. Doubling the amount of a single component of overall costs will have a dramatic impact on the Cost of Goods Sold (total costs). Can the McDonald’s franchisee absorb these costs? Not likely, so they’ll have to pass them along to the consumer in the form of higher retail prices. McDonalds is in a highly competitive world and the market forces there can be very brutal and swift. If we are to agree that a decent minimum wage is desirable and that it should be effective, why set the wage at only $6 or $7 per hour? A $7 per hour wage, for a 40-hour work week, will yield $280 per week or about $14,560 per year (assuming no vacation time). No family man can raise a family of four on those wages. At best, you would be renting a box in a poor neighborhood in a poor city or town. Currently the protestors in New York City (NYC) are demanding $15 per hour. That equates to $30,000 per year ($15 * 40 hours * 50 weeks, assuming 2 weeks non-paid vacation). Where in NYC can one live on that amount? You can’t so is the solution to raise the minimum wage even higher? Let us say that in order for a family of four to have a reasonable shot at the American dream of owning a car, a home and living in a decent town/city/neighborhood, will require him to earn say, $50,000 per year for a family of four. $50,000 / 50 weeks / 40 hours = $25.00 per hour. That sounds great! Okay, the minimum wage is now $25.00 per hour and all employers must pay their employees that wage. But here’s where the argument runs off the rails. The average employee at McDonalds, Burger King, Target Stores, etc. starts at the minimum wage. Currently the minimum wage is approximately $7.00 per hour so with the increase we jump to 3.57 ($25 / $7) times the current...